German public auditor calls for risk-free pension fund investment

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GERMANY - The public auditing board of the German province of Saxony-Anhalt has criticised the finance ministry for taking "unnecessary risks", such as investing pension fund assets in equities.

The north-east German province set up a pension fund for its civil servants in 2006 - it had accumulated around €145m in the fund to year-end 2008 (see earlier IPE story: Crisis halts pension fund creation).

To date, the money has been invested in short-duration deposits only, as investment regulations have not yet been passed - a delay the public auditing board criticised.

For 2010, the fund is planning to award the first mandates to implement an asset allocation that includes an 8-12% equity exposure, with any FX exposure being 100% hedged, a spokesman for the finance ministry of Saxony-Anhalt confirmed.

According to the public auditing board, this is unnecessary risk taking.

It called on the ministry to waive "risk-heavy positions" such as equities and foreign currency bonds.

This additional risk is taken because the finance ministry has set down a target return of 5%, while in an initial assessment prior to the fund's creation an actuary had used a 4.5% return in his forecasts.

The ministry spokesman said the criticism had not led to a change in the regulations and that the fund would therefore continue to prepare the tenders.

Furthermore, the public auditing board noted that, for some months in 2007 and 2008, money allocated the fund had not been invested immediately, which cost the fund as much as €1m in interest.

However, the ministry spokesman pointed out the fund did not suffer any "losses", as the money had been shifted within the government's investment pools.

He added that some of the delay was actually down to a delay in an approval from the public auditing board itself.

"We were not dozing, and the fund has not suffered any losses," he said, adding that much the criticism had been "politically motivated".

The public auditing board also called on the finance ministry to coordinate with the province's credit department, which is to take over as controller for investment decisions.